H290897

HQ H290897 July 28, 2021 90 K Street N.E., Washington, DC 20229 U.S. Customs and Border Protection DRA 2, DRA 4 OT:RR:CTF:ER H290897 SMS Deborah Nicholl Vice President Barnes Global Trade, LLC 303 East Wacker Drive, Suite 1020 Chicago, IL 60601 Re: Request for a ruling concerning the drawback eligibility of machine tools under the unused merchandise provisions of 19 U.S.C. § 1313(j). Dear Ms. Nicholl: This is in response to your ruling request dated September 26, 2017, on behalf of Knuth Machine Tools USA, Inc. (“Knuth Machine”), regarding whether unpacking, repacking, oiling, testing, software patches, adjusting electrical voltage, and calibration operations performed on its machine tools constitute a manufacture or production for purposes of unused merchandise duty drawback pursuant to 19 U.S.C. § 1313(j). We regret the delay in response. FACTS: Knuth Machine imports machine tools into the United States and upon importation the machine tools undergo several operations, prior to their exportation. On August 31, 2016, and September 1, 2016, Knuth Machine filed a combined privileges application and drawback entry number xxx-xxxx801-0, respectively, with the Chicago Drawback Office under 19 U.S.C. § 1313(j)(1). Knuth Machine was advised by the Chicago Drawback Office to request a ruling to determine eligibility under unused merchandise drawback, and that CBP would hold their application and claim pending this decision. In your ruling request you explain that the imported machine tools undergo the following operations in the United States, prior to exportation: Unpacking – Removal from pallets, plastic, padding, strapping, and/or crates Oiling – The machines are filled with oil and tested by their manufacturers… Then the oil is removed from the machine prior to shipment to the United States. Knuth then replaces the oil again in the United States in order to test the machine. The machines are shipped to customers from the United States with lubrication. Testing – A dry run test is performed on each machine to ensure full electrical and mechanical function. No metal or other material is cut, ground, bent, etc. during the tests . . . . Calibration- Comparing measurement values delivered by the machines to certain technical specifications and adjusting, if necessary, to bring errors to an acceptable level. For instance, ensure that the laser on a cutting machine is at 1” when the machine is set to cut at 1”. Adjustment of electrical voltage – About 30 percent of Knuth’s machines must be fitted with a transformer to transform the voltage at the customer’s facility . . . to the 480 volts that the machines are built to operate with. [Either stand-alone transformers or transformers mounted on the side of the machine] . . . . Repacking – wrapping machines in plastic and/or padding material and strapping to pallets and/or crating. You also explained that, in addition to the above listed operations, occasionally “operational software updates or ‘patches’ are uploaded onto their CNC (computer numerical controlled) machines….” The software uploads are updates and/or ‘fixes’ for the operational software already present in the machines’ numerical controller.” You contend that these operations are all essentially testing and adjusting/ replacing components, and that the machines are still the same machines. Thus, you request confirmation that these operations do not amount to a use for drawback purposes. ISSUE: Whether the described operations constitute a use of the machine tools under the unused merchandise provisions of 19 U.S.C. § 1313(j). LAW AND ANALYSIS: Pursuant to 19 U.S.C. § 1313(j)(1), drawback is authorized “if imported merchandise, on which was paid any duty, tax, or fee imposed under Federal law upon entry or importation” is, within five years of the date of importation, exported or destroyed under CBP supervision and was not used in the United States before such exportation or destruction. A definition of the term “unused merchandise” was not provided in the language of the act. However, in HQ 225552, dated November 1, 1994, we discussed Customs Service Decision (“C.S.D.”) 81-222, dated May 27, 1981, and C.S.D. 82-135, dated June 4, 1982, which found that an article is used when it is employed for the purpose for which it was manufactured or intended. An article is also “used” when it is used in the manufacture or production of another article. See C.S.D. 82-67, dated December 22, 1981. Additionally, the performance of certain operations or combination of operations on the imported item, not amounting to a manufacture or production, is not treated as a use of the merchandise. The statute specifically provides in 19 U.S.C. § 1313(j)(3) that: [t]he performing of any operation or combination of operations (including, but not limited to, testing, cleaning, repacking, inspecting, sorting, refurbishing, freezing, blending, repairing, reworking, cutting, slitting, adjusting, replacing components, relabeling, disassembling, and unpacking), not amounting to manufacture or production for drawback purposes. . . shall not be treated as a use of that merchandise. . . 19 U.S.C. § 1313(j)(3). For Knuth Machine to claim drawback under 19 U.S.C. § 1313(j), the combination of operations it performs on the machine tools while in the United States cannot be considered a “use” within the meaning of the statute. Certain processes are permitted, but they cannot rise to the level of a manufacture. Therefore, an operation or series of operations that is deemed to be a “manufacture or production” would disqualify the machine tools from this type of drawback. We note that Knuth Machine listed operations of testing, repacking, adjusting, repairing, and unpacking are allowable operations specifically listed in 19 U.S.C. § 1313(j)(3), however, oiling, calibration, and patch uploading are not. Therefore, we need to consider whether this combination of operations would constitute a manufacture. CBP regulation, 19 C.F.R. § 190.2, defines the “manufacture or production” within the drawback context as follows: Manufacture or production means a process, including, but not limited to, an assembly, by which merchandise is either made into a new and different article having a distinctive name, character or use; or is made fit for a particular use even though it is not made into a new and different article. 19 C.F.R. § 190.2. This definition reflects the holding in Customs Service Decision (“C.S.D”) 82-67, dated December 22, 1981. In that decision, Legacy Customs considered whether certain operations performed on imported cotton towels constituted a manufacture or production for purposes of manufacturing drawback. Those operations included weighing, inspecting, trimming, folding, spraying, and wrapping the towels in polyethylene film for use by airline passengers. In the analysis, the decision discussed the judicial test established by the Supreme Court of the United States in Anheuser-Busch v. United States, 207 U.S. 556, 562 (1907). In that case, the Court held: [m]anufacture implies change, but every change is not manufacture, and yet every change in an article is the result of treatment, labor and manipulation. But something more is necessary . . . . There must be a transformation; a new and different article must emerge, having a different name, character, or use. Id. Additionally, C.S.D. 82-67 adopts the “fit for a particular use” standard established by the former Court of Customs and Patent Appeals in United States v. International Paint Co., Inc., 35 CCPA 87 (C.C.P.A. 1948). C.S.D. 82-67 states that the decision in International Paint: [a]ppears to support Customs’ more recent interpretation of “manufacture” as a process brought about by significant investment of capital and labor to produce articles or commodities which, despite the fact they are in some cases much the same as their commodities prior to processing, have been made suitable for a particular intended use. In determini

Pursuant to 19 U.S.C. § 1313(j)(1), drawback is authorized “if imported merchandise, on which was paid any duty, tax, or fee imposed under Federal law upon entry or importation” is, within five years of the date of importation, exported or destroyed under CBP supervision and was not used in the United States before such exportation or destruction. A definition of the term “unused merchandise” was not provided in the language of the act. However, in HQ 225552, dated November 1, 1994, we discussed Customs Service Decision (“C.S.D.”) 81-222, dated May 27, 1981, and C.S.D. 82-135, dated June 4, 1982, which found that an article is used when it is employed for the purpose for which it was manufactured or intended. An article is also “used” when it is used in the manufacture or production of another article. See C.S.D. 82-67, dated December 22, 1981. Additionally, the performance of certain operations or combination of operations on the imported item, not amounting to a manufacture or production, is not treated as a use of the merchandise. The statute specifically provides in 19 U.S.C. § 1313(j)(3) that:[t]he performing of any operation or combination of operations (including, but not limited to, testing, cleaning, repacking, inspecting, sorting, refurbishing, freezing, blending, repairing, reworking, cutting, slitting, adjusting, replacing components, relabeling, disassembling, and unpacking), not amounting to manufacture or production for drawback purposes. . . shall not be treated as a use of that merchandise. . . 19 U.S.C. § 1313(j)(3). For Knuth Machine to claim drawback under 19 U.S.C. § 1313(j), the combination of operations it performs on the machine tools while in the United States cannot be considered a “use” within the meaning of the statute. Certain processes are permitted, but they cannot rise to the level of a manufacture. Therefore, an operation or series of operations that is deemed to be a “manufacture or production” would disqualify the machine tools fro